Enphase Energy Inc (ENPH) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Enphase Energy second-quarter 2012 financial results conference call. At this time, all participants are on a listen-only mode. Later we will contact a question-and-answer session, and instructions will follow at that time. (Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. David Niederman. You may begin.

Good afternoon. Thank you for joining us on today's conference call to discuss Enphase Energy's fiscal second-quarter 2012 results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Enphase Energy's website at enphaseenergy.com.

With me on today's call our Paul Nahi, Enphase Energy's Chief Executive Officer; and Sanjeev Kumar, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its fiscal second quarter ended June 30, 2012. If you would like a copy of the release, you can access it online at the Company's website, or you can call The Blueshirt Group at 415.217.7722, and we will fax or e-mail you a copy.

During the course of this conference call, Enphase management will make forward-looking statements including but not limited to statements related to Enphase Energy's financial performance, market demands for its microinverters, advantages of its technology, market trends, and future financial performance. These forward-looking statements are based on the Company's current expectations and inherently involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties.

Factors that could cause results to be different from these statements include factors the Company describes in its press release as of today, especially under the section entitled Forward-Looking Statements, as well as those detailed in the section entitled Risk Factors of the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2012.

Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Enphase Energy cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statement as a result of new information, future events, or changes in its expectations.

Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release posted today, which can also be found in the Investor Relations section of our website.

Now I'd like to introduce Paul Nahi, Chief Executive Officer of Enphase Energy. Paul?

Thank you, David, and thanks, everyone, for participating on today's call. We made good progress in our second quarter and our first full quarter as a public company as we continue to execute against our goals and lead the solar industry's transition to microinverters.

Our second-quarter revenue of $55.7 million represents a year-over-year growth of 88% and was our strongest second quarter to date. Our revenue for this quarter, which is in our seasonally softer period, is within striking distance of the record sales we achieved in the fourth quarter of 2011. This speaks to our momentum and the continued strong embrace of our solution in the market.

In addition to our robust sales, we also continued to improve our gross margin. Gross margin of 24.4% in the second quarter was a record for Enphase, coming in well ahead of the 21.8% last quarter and substantially above the 16.2% in the second quarter 2011. Our gross margin improvement this quarter was largely driven by ongoing product cost reductions, increasing volume, and additional items that Sanjeev will outline in more detail in a few minutes.

Regarding market development, we continue to see very good demand for our microinverter solution in the US, as the solar market here continues to exhibit solid growth. Our success further underscores what we believe is the undeniable shift away from legacy string and central inverters to microinverters. We are confident that over the long term, microinverters will be the preferred solution for all rooftop installations.

In fact, last month we launched several initiatives that target the growing commercial market. To date we have seen very strong enthusiasm for our commercial solutions, even without targeted sales and marketing campaigns. Our new commercial program offers free training for integrators on designing and installing our microinverter system, and free commercial technical design resources to ensure projects are supported from inception to installation and activation.

To date we have trained over 250 distribution sales reps on this program, who will communicate the benefits of the Enphase system to their installer partners. Although this program has only been in place a few weeks, we've only seen a very positive response from existing and potential customers.

The commercial segment continues to hold very strong potential for Enphase. As a recent example of our commercial success, we were selected by Microgrid Solar to be part of the new solar array at Busch Stadium, home to the St. Louis Cardinals. This installation highlights the value of an Enphase system -- specifically, superior energy production and high reliability, while our local DC inverters are a safe solution for the fans and employees that use the stadium daily.

We also see indications of strong interest for our products and solutions in Europe. As a reminder, we began shipping initial product in Q4 of last year and commenced volume shipments to France and the Benelux region in the second quarter of 2012.

Our conversations with prospective customers and distributors at the recent Intersolar Show in Germany were very encouraging. The enthusiasm and early adoption of microinverters in Europe are reminiscent of our experience in the US a few years ago and give us confidence that our efforts there will bear good results over time.

Additionally, we opened up by newest country office in England in June. According to IMF's Research, the solar market in the UK is forecast to grow nearly 30% annually for the next several years, and we look forward to using this base to leverage our expansion in this region.

Though we saw a good response from France and the Benelux region in the second quarter, recent regulatory changes and the overall challenging macroeconomic climate make forecasting demand from Europe and Canada a little more challenging.

Let me spend a moment addressing some of the high-level issues in solar that we've seen in the headlines over the past several weeks. Clearly, the solar industry is in flux, with declining panel prices, government intervention, and potential consolidation all contributing to the ongoing change in the market. While these developments contribute a degree of uncertainty, there is no question that the solar market is continuing to grow, particularly in the US, which is our strongest market, as more and more consumers look to solar for their energy needs. And even with this uncertainty, Enphase has succeeded in growing faster than the market, which we believe highlights the compelling nature of our value proposition of superior energy output, ease of installation, and unparalleled reliability.

It is this value proposition that is fielding the transition to microinverters and enabling our success, and this value proposition is driven by our technology and our focus on providing installers with a complete solution that enhances their business opportunities and minimizes time on the roof.

We've made significant strides in rounding out our solution for installers. The M250 microinverter leads the marketplace with respect to performance, reliability, and ease of installation. And Enlighten, our web-based software platform, provides best -- best-in-class monitoring capability, which puts us even further ahead of the competition.

As you may have seen, we recently released the latest version of Enlighten. With this new version, we are offering enhanced visibility into energy production and system status, helping our commercial customers better manage multiple systems with fleet-level production reporting, and providing more access to historical and comparative performance data. Enlighten has become the solar energy management platform from which we can build tightly integrated hardware and software tools that simplify the design and installation process and bring new features and functionality to our customers.

In addition to Enlighten, we have several new products to help our installer partners. Most recently we introduced the Enphase Metering and Management Solution, which features a revenue-grade meter. This is an all-in-one solution for third-party-owned solar systems that measure power production and provides ongoing monitoring and performance analysis through Enlighten. This solution delivers a single platform for managing both microinverter and revenue-grade meter data to meet the requirements of solar leases, power purchase agreements, and [athrak] monetization.

Looking ahead, we're excited to roll out a new installation tool that has been seen by thousands of installers over the past few months as we crossed North America on our annual Enphase Installer Roadshow. The new Enphase array gun allows installers to easily scan barcodes on the microinverters and quickly build arrays in real time through Enlighten at the touch of a button. I believe that installers of all system sizes will love this new product, and in particular, commercial installers, who will realize significant time savings.

Our microinverter solution offers the most complete set of options for our commercial and residential installers of financed and non-financed systems. By tightly integrating our products into Enlighten, we are building the most comprehensive solar energy management platform in history.

Enphase is laser-focused on maintaining our technological lead. We are doing this by containing to drive improvements in each discipline required for our market-leading solutions. These include semiconductor design and integration, power electronics, power line communications, and our web-based software services.

Each of these alone is highly complex and difficult to master. Successfully integrating them is even harder. We believe Enphase remains the only Company shipping a complete microinverter solution in volume today.

Before I turn the call over to Sanjeev Kumar to discuss our financial results, I want to take a moment to address the announcement we made earlier today that Sanjeev has decided to leave Enphase. I want to thank him for his tremendous contribution. Sanjeev has played a significant role in our growth and was a leading force in our IPO. We are grateful for everything he has done and wish him well in his next endeavor. Sanjeev will continue in his role into Q4 as we search for a new CFO.

And with that, I'll now turn the call over to Sanjeev.

Thanks, Paul. I also want to extend thanks to everyone at Enphase for the terrific experience. It was not an easy decision to make. I believe Enphase will continue transforming solar, and I remain excited about the future of the Company. I am very committed to ensuring a smooth transition to a new CFO and will work closely with Paul and the team during this period.

Now, turning to our quarterly results, we had a very solid second quarter, with revenues of $55.7 million representing growth of 88% from Q2 of 2011 and nearly 31% from the first quarter of this year. For the six months ended June 30, revenues were $98.3 million, representing growth of 106% over the first half of 2011.

For the second quarter of 2012 we shipped approximately 403,000 microinverters, representing shipments of approximately 86 megawatts. We primarily sold our third-generation product and shipped a small number of our second-generation product, which is being phased out.

We are pleased by the performance this quarter. While we possibly saw a couple of million dollars of sales that were pulled in from Q3 due to the 1603 program, our progress this quarter represents strong growth. We continue to build a footprint in Europe and are encouraged by the progress. Sales to the European region in the second quarter were primarily to France and the Benelux region, with some initial shipments to Italy.

Gross margin in the second quarter was 24.4%, which is a record for Enphase. This compares to 16.2% in Q2 of 2011 and 21.8% in the first quarter of 2012. The increase in gross margin was driven in part by continued reduction in production costs, as well as favorable mix -- product mix as we continue to sell more of our third-generation product.

As a reminder, although we announced a price reduction in April, we did not experience the full impact of this reduction in Q2 due to recognition of deferred revenue for sale which occurred before the price reduction. This positively impacted our gross margin by approximately 1.3%. Even without this benefit, we achieved record gross margin and are very pleased with the ongoing progress we're making in gross margin expansion.

Operating expenses in the second quarter of 2012 were $21.1 million as compared to $14.3 million in the second quarter of 2011. On a sequential basis, our OpEx increased by $2.5 million to $21.1 million in Q2 from $18.6 million in the first quarter.

As a percent of revenue, OpEx declined sequentially from 44% in the first quarter of 2012 to 38% in the current quarter. This speaks to the operating leverage we expect to continue to get as our top line grows. As a reminder, our OpEx is primarily driven by headcount. You will recall that hiring in the first quarter was lower than we had planned. We made good progress in our hiring goals in the second quarter.

Breaking down the Q2 OpEx further, $8.7 million was in R&D; $6.4 million was in sales and marketing; and $6.1 million was G&A. Regarding R&D, we added personnel fairly evenly across our hardware and software teams as we continued to develop our next generation platform.

For SG&A, the expense increase was driven by both sales and marketing as we expand our global presence and also as we continued to build our corporate infrastructure. We are continuing to make the appropriate investments in both R&D and SG&A to support our ongoing growth. We anticipate the full impact of this hiring will be realized in the third quarter and expect to achieve significant operating leverage from these investments in 2013.

Operating loss for the second quarter declined to $7.5 million from $9.3 million in the first quarter. As we have emphasized before, we are investing in 2012 to capture what we believe is a significant growth opportunity. We are very mindful of our goal of profitability and will scale our OpEx plans accordingly.

Regarding nonoperating expense, I want to point out the increase in interest expense to $3.4 million during the quarter. This reflects a $2.8 million non-cash charge to write off the remaining unamortized deferred financing costs. This charge is related to the termination of our convertible facility upon the completion of the IPO in April.

Our operating cash flow for the quarter was negative $17.8 million. Impacting the cash flow in this quarter was the recognition of the deferred revenue of approximately $16 million. Cash for this deferred revenue was received in December of 2011 for sales under the section 1603 program.

Turning to the balance sheet, we ended the second quarter with strong liquidity. As of the end of June, we had cash of nearly $67 million. In addition, our working capital facility remains undrawn. We ended the second quarter with inventory of approximately $31 million.

As you may recall, we had approximately $20 million in convertible debt at the time of the IPO. This debt converted to equity in April upon the completion of the IPO.

Turning to our outlook for the third quarter, as Paul discussed earlier, we anticipate continued momentum in the US, moderated by more challenging environments in Europe and Canada. Balancing these trends, we expect revenues for the third quarter to be within a range of $59 million to $63 million. Even after consideration of the Q2 price reductions, which will be fully realized in Q3, we expect gross margins to be within a range of 23.5% to 25%.

I would like to now turn the call back to Paul.

Thanks, Sanjeev. In summary, we had an excellent second quarter and are excited about our upcoming seasonally stronger second half of the year.

I'd now like to open up the lines for questions. Operator?

(Operator Instructions). Sanjay Shrestha, Lazard Capital.

It is [Disont Cruy] -- here from Lazard Capital Markets. Could you give us an update on the traction you're getting in Europe, and maybe touch on the key geographies and some of the discussions you are having with customers, and then balance it out with how you expect that to play out, say, over the next quarter or two?

Sure. So the traction in Europe has actually been outstanding. The France and the Benelux region have been -- we have been very warmly received in those areas.

As I mentioned a few minutes ago, the reception that we're is seeing in those regions is very similar to what we've seen in the US a few years ago, and I think it's indicative of a very strong demand for microinverters, for pretty much the same reason that we've seen in the US, which is superior energy production and ease of installation and reliability.

So given the strong interest we've seen there; given the strong interest we've seen in the past in Canada, we're fully expecting that Europe will be a very significant portion of our revenue in the upcoming quarters. And we're actually looking at future countries that we'll be entering shortly. As you know, we've already announced that we've already opened our third European office in the UK just recently.

Great, thank you. That's all we had, thanks.

Colin Rusch, ThinkEquity.

Thanks for getting me in, guys. Can you talk about your percentage of business that's coming from rooftops or systems larger than 50 kilowatts at this point? Do you have a good handle on how much your product is going into commercial rooftop installations?

Colin, we don't break that out. However, we do have a very good feel for it internally. Through Enlighten, we see many of our systems come online and we know how big they are; we know where they are; we have, actually, a lot of attributes about them.

Our commercial share is already significant. It's in double digits. However, this has happened despite the fact that we haven't had a real strong commercial push yet. Our most recent marketing endeavor, which we call the Limitless campaign, is targeted very specifically at commercial developers. I think it's been received very well so far, and I'm very optimistic that that will help us gain the awareness in other commercial developers as well, and increase our total share of commercial.

Great. And then as you're working with third-party finance solutions, can you talk about how any of them are tracking the yield benefit that you guys have demonstrated over the last few years, and how difficult it is to get full credit for that in those third-party solutions?

It really varies by solution provider. There's some providers who give us credit for the additional energy harvest or some portion of it immediately. Others may not. It's really -- that's a question, I think, best reserved for them.

The good news is that we have tremendous traction with many, if not most, of the third-party financial providers out there, companies such as Vivanta, Astrum Solar, CleanPower Finance, SunRun, and many others. So the traction is very strong, and I think that traction is, in part, a result of the extra energy we produce. It's partly due to the simplified installation which reduces the labor costs, and the fact that Enphase, I think, has proven itself to be a very bankable, reliable solution.

Great. Thanks a lot, guys.

Thank you.

(Operator Instructions). Jesse Pichel, Jefferies.

Your Q3 revenue guidance is a bit below what the Street consensus has been, and you mentioned a weaker Europe as a possible reason. Could you elaborate on that?

Given your low penetration there, we wouldn't think that end market demand would yet affect your growth there. And are you starting to see any type of penetration plateau in the US? And then I have a follow-up.

We are not seeing a penetration plateau in the US. Our penetration growth, our market share growth, continues to increase. We're feeling very good about that.

There are regulatory issues that we have seen in Canada and in Italy that have affected those markets. The Canadian market, as you may know, represented almost 12% of our market share -- sorry, 12% of our revenue in 2011. That was down to low single digits, very low single digits in Q2 as a result of some regulatory issues in Canada.

Now we're not -- long term, we're not at all concerned. The OPA, the Ontario Power Authority, has gone a long way toward resolving those issues. We expect sales to start to pick up this quarter. And over the next several quarters we expect to have -- to see strong demand in Canada. But over the short term, there are some fluctuations.

Okay. I know I should have said, you're still growing, which is a heck of a lot better than anyone else. So that's great.

Trying to get a gauge on -- what most investors are really concerned with are, given the new technology, is if there's any returns going on. Could you review for us what is your RMA rate or returns rate? How does that track versus what you have been reserving for returns?

I will leave the second half of that question to Sanjeev. I'll say on the first half, our RMA rates are looking very good. We don't announce the specific numbers, but our latest product, the M215, is far and away the most reliable product on the market today. We continue to improve, not just quality, but improve by adding features and functions as well.

We're very, very pleased with what has happened out in the field. And I'll let Sanjeev speak to the numbers.

In terms of the accrual, Jesse, the accrual in the second quarter is actually lower than what it historically has been. We took a $1.6 million charge, a write-down in relation to our positioning a second-generation product.

That write-down provided a corresponding benefit in the warranty reserve. On a net basis, down to the gross margin of the operating income/loss line, there is no impact. But it did reduce our accrual. It was slightly under 3% historically. The accrual has been between 4% and 5%.

But in terms of the key assumptions, like the return rates, those assumptions haven't changed in calculating our accrual.

That's good news. Maybe I could just -- I'll fit in one more. You're spending still quite a large amount on R&D, and one has to look at the evolution of your technology as something that could be quite impactful to the cost per watt and the performance of panels. Could you give us a little bit of a glimpse into what you're thinking in terms of what a next-generation product might look like?

Sure. Obviously, I can't go into too many specifics, but what I will say is that our fourth-generation technology, which is up and running in the labs today -- it does more of what we give today in terms of adding features and functions. It certainly does reduce -- there's a cost reduction associated with it. But we're adding features and functions, quite frankly, that nobody is even considering of today. So I think it's going to be truly a next-generation product.

And just to remind you of one thing, Jesse, we're not waiting for that next-generation product to continue our cost reduction. We do plenty of cost reduction, and we can R&D our way into lower costs even within a particular product line or a particular generation of product, which is what we're seeing right now. And it is in part the reason why we were able to have a price reduction and still see an increase in gross margin last quarter.

Great. Thank you very much.

Thank you.

Mark Bachman, Avian Securities.

Sanjeev, can you go back over your Q3 guidance real quick? I know that Jesse alluded to you fell a little bit short, but didn't you also talk about that you actually pulled in some sales from Q3 into Q2, which gave you some outperformance here and might have affected that guidance there for Q3?

That is correct, actually. We did pull in, we believe, close to a couple of million dollars into Q2 from Q3. So the rate of growth, if you account for that, levelized for that, it's higher than our guidance.

Okay, so it is so much attributable, then, to the difficulties that you are seeing in a couple of regions in Europe, then. Is that correct?

The way I would look at that is that if you account for a couple of million dollars of pull in the 1603, I think that would probably make the adjustment to guidance. The good news is that even despite that, we have been able to continue to grow both domestically and internationally, and we're seeing tremendous demand universally for the products. So I think the combination is what is very powerful.

Excellent. And then Paul, if you look at the Street estimates might now, most of the Street estimates are hovering around 80% year-over-year unit growth. I know that you don't want to give a number here going forward for the full year, but what's your feeling on -- how good do you feel to be able to achieve that kind of number that the Street has put on you?

Unfortunately, I can't really answer that. We're only guiding to the quarter. What I can say is that we're feeling very good about our ability to penetrate and gain market share in markets that have shown some kind of legislative stability.

In areas where we've seen some challenges, it obviously -- it doesn't uniquely affect Enphase, but it would certainly affect Enphase as well. But importantly, I think, the transition to microinverters is well underway. We lead that charge and we're taking that global.

Excellent. And then last question for me. On the price reduction, there was a comment made in there that the full effect of the price reduction would be seen in Q3. Is that because you gave that price reduction part way through Q2?

It is actually primarily -- Mark, it relates to the fact that almost $16 million of revenues that we recognize in Q2 related to the sales of the 1603 program, which was that the older price before the price reduction. So that is what provided that 1.3% benefit in Q2. So therefore, the full impact of the price reduction could really be realized in Q3.

Excellent. Thank you so much.

Thank you.

Thank you.

Smittipon Srethapramote, Morgan Stanley.

This is Tim Radcliffe on for Smitti. Thanks for taking my question. We had one question about the competitive positioning relative to other new entrants in the micro market. Can you comment on any new entrants, what you're seeing out there?

I think I would reiterate what I said in our last call, which is as soon as we see a product in the market, a viable product in the market, we'd be happy to comment on it. We're not seeing anything today that is providing any significant competition.

At the same time, we're very well aware that the market space is large. It will not go uncontested. There will be competitors, which is why we are investing in R&D, which is why below pushing forward on all the different technologies, the power electronics, the communications, the web-based services.

But as of today, there's not a whole lot I can comment on, except perhaps to say that even based on some anecdotal data, based on data sheets, the specifications of products we've heard that may come out are still below the specifications of our current product that we've been selling for over year now.

So again, we fully expect there to be competition. We expect it to be formidable, but we're not seeing it yet.

Got you. Okay. And when you talk about spec sheets, and that includes PowerOne's micro?

Everybody's, yes. Everybody's that we have seen.

Great. Thanks, Paul.

Sure.

Thank you. I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Okay, well, thank you, everybody, for joining us today, and we look forward to speaking with you again next quarter and updating you on our progress.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.